Agencies like the California Labor Commission have issued rulings that Uber drivers are employees, not contractors. What does that mean to the future of the “on-demand economy.”

In decisions that call into question one of the foundations of the “on-demand” or “sharing” economy, several courts and state agencies, including the California Labor Commission, have issued rulings that Uber drivers are employees, not contractors. Ultimately, if Uber and other companies that provide marketplaces for independent workers are not able to win in court, adjust their practices, or convince federal, state and local lawmakers to change laws that re-define the independence of such workers, a key component of the on-demand model is in doubt. This article is an overview of the issue and includes a prediction: Uber and others will make the adjustments necessary to preserve the independence of contractors (or drivers, designers, writers, etc.). It was written by Rex Hammock, founder of SmallBusiness.com.

Background

In arguments against the driver who brought a case against Uber before the California Labor Commission, the company claimed it is a logistics company—that it created an app that facilitates private transactions between driver and rider. The company claimed it does not control the hours its drivers work and does not require drivers to complete a minimum number of hours.

Uber lost.

According to Reuters, “the Labor Commission cited many instances in which Uber acted more like an employer. The ruling noted that Uber provided drivers with phones and had a policy of deactivating its app if drivers were inactive for 180 days.” In its ruling against Uber, the commission said Uber is “involved in every aspect of the operation.”

In another case, a federal court in San Francisco rejected Uber’s bid to deem its drivers independent contractors. And earlier this year, a Florida state agency issued a similar ruling defining Uber drivers as employees.

These, and other rulings, are all being appealed by Uber.

Why is the employee vs. independent contractor issue so important?

As Steve King of Emergent Research (and a contributor to SmallBusiness.com) has pointed out, Uber and similar “on-demand,” “sharing,” or “Uber for X” companies all have business models built on the use of independent contractors as service providers. “Most of these companies are trying to attract independent contractors from roughly the same pool—people looking for flexible, independent work in the service sector,” says King. “A lot of these types of workers are only interested in part time work.”

By 2020, independent workers could be as much as 43 percent of the U.S. workforce, King says. This new form of flexible, independent work—an “on-demand economy”—has even spawned a new eco-system of products (including some we’ve written about) and services that help independent workers turn part-time work into full time opportunity.

What does this battle over the definition of of the word “employee” mean for the future of Uber and “Uber for X”?

Uber has a massive war chest filled with the cash and clout necessary to fight rulings of courts and regulators across the country and around the world. And as already apparent, fighting local regulations is a day by day skirmish for Uber. What it learns in one skirmish, it can apply in the next. (Unfortunately, Uber often is its own worst enemy when it comes to the attributes one needs in regulatory battles.*)

This a serious challenge to Uber and the on-demand economy model: Take away the argument that Uber is something other than a tech company that facilities a marketplace of buyers and sellers, and you can see all sorts of Humpty Dumpties start falling off walls between new models of independent work and old notions of employment.

If this all sounds familiar …

In another era with another tech company, the battle over the meaning of the word employee played out over many years. Vizcaino vs. Microsoft still has implications over how independent software developers and other “contract” employees are defined and treated by large organizations they may work for on a project or for a defined period of time. While Microsoft lost the battle, the ruling led to Microsoft being able to more tightly define worker engagements after the ruling.

The company (and others in the tech field) are now more precise in how they define relationships with independent or temporary labor. The ruling also led to new federal laws and regulatory guidelines (like “Section 530” of the IRS Code) that provide more, but still not complete, definitions related to the meaning of “employee.” At some point in the future, Uber and other on-demand models of independent work will have to fight this battle at the legislative and IRS rule-making level.

Prediction: After years of lawsuits and lobbying, the future will win

In the end, will the State of California—the Ground Zero of the on-demand economy—be the place the on-demand economy ends? That’s an easy answer: No.

In a way that may be similar to the decades of epic battles that took place during the early days of other technology like the war over electricity currents patent fights over inventions and breakthroughs like the telephone and mechanized flight, the on-demand economy will be won by whatever side is left standing when the future arrives and it becomes apparent to all what the future is, not merely theories of what it may be.

That’s not to say Uber, itself, will win, or not. However, the on-demand economy will.

And even if Uber “loses” as a company, its loss will be that it doesn’t measure up to the valuation investors place on its share price. The company has already “won” in disrupting an industry no one dreamed could be disrupted. But is the value of that disruption $34 billion? If it doesn’t sustain that value, is it a failure of the company or of the investors who bid it up to that value before all the legal issues were worked out? (I’m not an investor, so I don’t know.)

Venture capital companies have christened Uber the “it” company of the on-demand economy, but the challenges of fighting cab companies (and the powers behind them) and, ultimately, the IRS, may bring the expectations of investors in line with reality.